A guide to first-time home buyer assistance programs in Alabama

Life is full of big milestones, like your first car and first paycheck, but there’s no achievement quite like buying your first home. Never mind that it’s a lofty financial commitment – the home buying process itself is no simple feat.

Luckily, if you’re a low- to middle-income first-time home buyer, there are loan programs built with you in mind. Assistance programs and grants can help ease some of the stress tied to buying your first home.

The first-time home buyer (FTHB) programs available typically vary by state. Thinking of buying a home in Alabama? Here are the programs and grants to look into before moving down south.

What types of assistance are available for first-time home buyers in Alabama?

For most first-time home buyers, the biggest challenge is saving up for the costs of buying a house. From the down payment to closing costs, it can feel like years before you’ll have enough.

That’s why first-time home buyer assistance programs exist to help. Whether it’s more lenient lending requirements, down payment assistance or a second mortgage, the help these programs offer may be just the push borrowers need to achieve homeownership.

Remember, while first-time home buyer assistance programs are available throughout the U.S., they are usually offered locally. In this article, we’re focusing on those offered in Alabama. If you’re considering other areas, be sure to check out the assistance offered for that specific state.

Housing counseling services, like home buying and homeownership classes or financial counseling, are also available locally. Consider looking into the services offered in your area for even more help with setting yourself up for financial success.

Who is considered a first-time home buyer in Alabama?

According to the Alabama Housing Finance Authority (AHFA), a “first-time home buyer” is anyone who has not owned a home in the last 3 years. To use AHFA programs, you must also meet income and purchase price limits. The house you buy must also be within Alabama state lines.

More specific requirements vary across AHFA programs and specific areas, so be sure to research based on your unique needs.

First-time home buyer assistance programs in Alabama

Backed by the AHFA, these programs are available to anyone considering a home in Alabama.

Sources: Alabama Housing Finance Authority, Huntsville Homeownership Programs

What is the Step Up program?

The Step Up program, similar to the closely named First Step program, is designed for moderate-income home buyers who can afford a mortgage but who may need help tackling the down payment. Through Step Up, eligible buyers can get a 30-year fixed-rate mortgage combined with a 10-year second mortgage which secures the funds for a down payment.

Pro

• One monthly payment: Since the loans are serviced by ServiSolutions, an AHFA division, you’ll only have one monthly payment, not two.

Con

• Mandatory course: To qualify for the program, you must complete a homebuyer education course.

What is the Affordable Income Subsidy Grant?

While Step Up aims to help with a down payment, the Affordable Income Subsidy Grant helps cover 0.5% – 1% of closing costs.

Pro

• Maximize savings: The Affordable Income Subsidy Grant can be combined with the Step Up down payment assistance program and a mortgage credit certificate.

Con

• Loan-specific: The Affordable Income Subsidy Grant can only be applied to HFA Advantage conventional loans, not FHA loans.

What is the Mortgage Credit Certificate?

A Mortgage Credit Certificate (MCC) is a tax credit which can give qualified homebuyers a larger federal tax break or tax refund each year.

Pro

• Instant savings: If you don’t want to wait, you can review the withholdings on your W-4 to get the tax break instantly.

Con

• Limited availability: MCC applications are accepted on a first come, first served basis by a statewide network of participating lenders.

What is FTHB Down Payment Assistance?

If you reside or are looking to purchase a home in the City of Huntsville, you may have even more options. Huntsville’s Department of Community Development offers numerous assistance programs to make homeownership more affordable. Most notable is their down payment assistance program (DAP).

Pro

• Down payment assistance: This program offers up to $10,000 that can be put toward down payment and closing costs.

Con

• Inflexible housing: In addition to other eligibility requirements, the property must be your primary residence for a minimum of 5 years.

Requirements for Alabama’s first-time home buyer programs

Although they can vary, it’s important to know the requirements for AHFA programs to see if you qualify. Let’s get started.

Sources: Alabama Housing Finance Authority, Huntsville Homeownership Programs

DTI

Your debt-to-income ratio (DTI) represents how much of your money goes toward paying off recurring debts compared to your monthly income. Let’s see an example.

Imagine you have the following monthly expenses (note that these are all regular, recurring debts):

• Rent: $1,500
• Student loan minimum payment: $125
• Credit card minimum payment: $100
• Minimum car payment: $300

With a monthly gross income of $5,000, calculating your DTI ratio would look like this:

$1,500 + $125 + $100 + $300 = $2,025

$2,025 ⁄ $5,000 = 0.40

0.40 x 100 = 40% DTI ratio

Your DTI is another indicator that lenders will look at as a sign of financial wellness. The lower the percentage, the better. To improve your DTI, consider the benefits of aggressive debt payoff strategies, like the snowball or avalanch methods.

Income limits

The Department of Housing and Urban Development (HUD) uses income limits to determine eligibility for assistance programs. Income limits vary by area and are updated every year, so be sure that your information is timely and accurate.

Owner occupancy requirements

State and federal home buyer programs are built to make homeownership more achievable. To reserve savings for aspiring homeowners rather than investors, many loan programs have owner occupancy requirements. This means using a property as your primary residence for a set period of time.

Before committing to a home with an owner occupancy requirement, figure out how long you plan to stay in the area. If your job requires frequent relocation or you’re not looking to settle down, pay extra attention to this aspect of your loan’s requirements.

Save up for homeownership: Alabama’s first-time home buyer savings account

Though fairly new, the First-Time Home Buyer Savings Account program is another valuable resource available for Alabamians. Through it, first-time home buyers or those who haven’t owned property in 10 years, can open a tax-free savings account at any bank, credit union or financial institution in Alabama.

The principal deposits and earnings will be deductible on your state income taxes and can be put toward the down payment and/or closing costs for a single-family home.

The bottom line: Alabama welcomes first-time home buyers with assistance programs

With a mortgage, down payment and closing costs, buying your first home can feel overwhelming. Sometimes all you need is some help, and that’s where first-time home buyer programs step in. Alabama’s programs for low- and middle-income home buyers can help you overcome financial hurdles and achieve homeownership sooner than you might think.

If you think you’re ready to plant roots in sweet home Alabama, start an application for approval online and start searching for your next home.